The law applicable to an arbitration agreement: Part II of our analysis of Enka v OOO Insurance

Following our Overviewand Part I of our article on Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 which deals with the majority decision, Part II below examines the reasons why the minority dissented from the holding that English law governed the arbitration agreement before the Court; and would have held that, in the absence of an express or implied choice, the law of the main contract, not the law of the seat, should govern an arbitration agreement.

The Minority: Lord Burrows, with whom Lord Sales agreed

The fundamental point that divided the Court was the law applicable to the main contract.  Dissenting, the Minority considered that, although the parties had not expressly chosen a law to govern their agreement, their choice of law had been “clearly demonstrated by the terms of the contract or the circumstances of the case.”  Accordingly, applying Art 3.3 of the Rome I Regulation, the Minority considered that Russian law governed the main contract as a matter of implied choice, rather than imputation under other provisions of the Rome I Regulation (as held by the Majority).

Thus, although the Majority and Minority were in agreement on many points of principle, their divergent factual findings led to different conclusions.    The Minority agreed with the reasoning of the Majority that the law of an arbitration agreement will follow that of the main contract in circumstances where the law of the main contract is determined as a result of express or implied choice.  As noted by the Minority at [260]:

“In [the Majority’s] view, the proper law of the arbitration agreement is here English law because there has been no choice of law for the arbitration agreement, express or implied, and the arbitration agreement has the closest and most real connection to England as the seat of the arbitration. Their decision would have been different had the proper law of the main contract been Russian law by reason of an express or implied choice. But because the proper law of the main contract is, in their view, Russian law, only because it has the closest and most real connection to Russia, that means that the proper law of the arbitration agreement is English law.”

The Minority also disagreed that, in the absence of an express or implied choice by the parties, the default rule as to the law applicable to an arbitration agreement should favour the law of the seat. The Minority’s reasons for preferring the law applicable to the main contract, were as follows:

1. Dépeçage is the exception, not the rule. Generally speaking, the entirety of a contract ought to be governed by one law unless there is a compelling reason to find otherwise in a particular case.  An example of when this would be appropriate would be where the “validation principle” requires a different law to apply to a provision in order to prevent it being rendered void or unenforceable.  Given that the present case involved a dispute as to the scope and interpretation of the arbitration agreement, and not as to its validity, this principle was of no application in the present case.

2. The separability doctrine operates so as to fulfil a specific function – namely, to prevent parties from resiling from their agreement to arbitrate if the main contract is held invalid – but this does not extend to determination of the conflict of laws rules applicable to the arbitration agreement.

3. Separating the arbitration agreement from the rest of the contract, especially in a multi-tier dispute resolution clause, may be problematic in practice. In the present case, the dispute resolution provision contained several clauses; some operative prior to arbitration and some providing for arbitration itself.  It would make no sense to apply two separate governing laws to the same clause, and the hypothetical use of two dispute resolution clauses – one operative prior to arbitration and the other an arbitration agreement – “surely…cannot make all the difference to the proper law issue.”

4. There had, in previous authorities, been excessive emphasis upon the law of the seat without any particular justification. Reasons for such emphasis may have been (i) a failure to distinguish the curial law, from the law applicable to the arbitration agreement; (ii) an outdated assumption that arbitrators of the seat would only be comfortable applying their own law and that parties ordinarily choose the seat with this in mind.  

5. There had also, in previous authorities, been insufficient weight accorded to the implied choice of the parties as to the law governing the arbitration agreement; an implied choice is just as much a choice as an express choice, and it makes “no rational sense” to place considerable weight to an express choice whilst placing little weight on implied choice. 

6. Separating the curial law and curial jurisdiction from the law applicable to the arbitration agreement is not problematic; in respect of the Arbitration Act 1996, the substantive provisions are non-mandatory and automatically do not apply where foreign law governs the arbitration agreement. 

7. By principled analogy, there is no reason why an exclusive jurisdiction clause contained in a contract should be governed by any other law than the law applicable to the main contract. Similarly, an arbitration agreement should generally be construed as governed by the law applicable to the main contract. 

8. Article V(1)(a) of the New York Convention 1968 is directly concerned only with the enforcement or recognition of a non-domestic arbitral award, not the validity of an arbitration agreement, much less questions as to its proper interpretation or scope.

Amplifying these reasons, the Minority was concerned at [251] to articulate general principles arising from the interpretation and application of the 1958 New York Convention, which generally supported preferring the law of the main contract, rather than the law of the seat, as governing the arbitration agreement in the absence of choice:

“On the face of it, the statutory provision (and article V(1)(a) of the New York Convention) does offer support in relation to the validity of the arbitration agreement and, at least at the enforcement and recognition stage, for applying the law of the seat where there has been no choice of law, express or implied, made by the parties. One may say that it represents a legislative policy, and a policy of international arbitration, which the common law should respect. However, in so far as one might apply this provision so as to make a practical difference to the determination of the proper law of the arbitration agreement (ie where one would be applying, as the proper law of the arbitration agreement, at the pre-enforcement stage, the law of the seat rather than the law of the main contract) there is a difficulty with reconciling that provision with the “validation principle” … unless one is to accept the unfortunate conclusion that the legislative provision may (sometimes) override the validation principle (of course sometimes it will be consistent with it), one will need to interpret the provision in such a way that, where the arbitration agreement would be invalid under the law of the seat but valid under the law of the main contract, the law of the seat will give way to the law of the main contract. The most obvious way of achieving this is to recognise that the provision confers a discretion. The relevant statutory words are that recognition or enforcement of the award “may be refused”. Assuming there is such a discretion, it should be exercised to accommodate the “validation principle”. The consequence would be that any practical difference, as to validity, between the proper law of the seat and the proper law of the main contract would be nullified.”

In a short concurring judgment, Lord Sales further noted that the Majority, having concluded that no choice of law had been made under the first two stages of the common law test for determining the law applicable to a contract, proceeded to apply stage (iii) by reference to the 1958 New York Convention.  By contrast, Lord Sales was of the view  that it remains the policy of the common law “to produce the answer which it is plausible to think businesspeople in the position of the parties, acting reasonably, would have been likely to have chosen for themselves if they had to confront the issue.”  As a result, the dividing line between stages (ii) and (iii) is not ‘crystal clear;’ many of the factors relevant to an argument that an implied choice of proper law can be identified at stage (ii) will also be relevant to the alternative argument based on the default rule at stage (iii).  Any other approach would “risk the appearance of arbitrariness to adopt a default rule at stage (iii) which was radically at variance in the results it produced by comparison with stage (i) and stage (ii).”

Lord Sales did not, therefore, agree with the approach of Majority in holding that stage (iii) of the common law test should be applied by reference to the 1958 New York Convention.  At [291] Lord Sales expressed the view that:

“Article V(1)(a) sets out a default rule within the scheme of the Convention which is different from the default rule under the common law and which, if applied, would undermine the validation principle when it is applied by the common law as an aspect of stage (iii) (see para 285 above). The provision states that, in the absence of a choice by the parties, recognition of an arbitral award may be refused if the arbitration agreement “is not valid … under the law of the country where the award was made”. That seems to say that recognition may be refused if the arbitration agreement is invalid according to the law of the place of the seat; but under the common law in such a case the validation principle would apply and the court would identify another system of law as the proper law of the arbitration agreement in order to uphold and give effect to the arbitration agreement. Article V(1)(a) thus sets out what can fairly be described as a very simple and inflexible default rule for the purposes of the Convention regime which is different from the more flexible and nuanced common law default rule of “closest and most real connection” and should not be taken to displace that rule … So far as choice of proper law for an arbitration agreement is concerned (as distinct from regulation of the recognition of foreign arbitral awards, which is governed by section 103(2)(b) of the 1996 Act), article V(1)(a) of the New York Convention is part of an unincorporated treaty and it is unclear by what process of legal reasoning it could be taken to have displaced the well-established common law default rule…”

Accordingly, the Minority would have held that Russian law governed the arbitration agreement and preferred a default rule which provides that, in the absence of agreement between the parties, the law of the main contract governs an arbitration agreement contained in that contract, not the law of the seat.

Commentary

Though in the minority, the judgments of Lords Burrows and Sales JJSC are worth examining, particularly for the analysis of the 1958 New York Convention.  Although the Majority considered there was considerable support for the proposition that the conflicts of law rule contained in Article V should apply by analogy to Article II, it should be noted that the commentators and scholars do not speak with one voice on the matter.  There is, therefore, ample scope in foreign arbitral proceedings conducted in Contracting States to canvass the reasoning and arguments of the Minority.

Works from which the Minority derived particular assistance, acknowledged at [259] include:  Lord Mustill and Stewart Boyd, Commercial Arbitration, 2nd ed (1989); Gary Born, International Commercial Arbitration, 2nd ed (2014); Robert Merkin and Louis Flannery, The Arbitration Act 1996, 6th ed (2019); Albert van den Berg, The New York Convention of 1958 (1981); Ardavan Arzandeh and Jonathan Hill, “Ascertaining the Proper Law of an Arbitration Clause under English Law” (2009) Journal of Private International Law 425; Adrian Briggs, Private International Law in English Courts (2014); and Edwin Peel, “The Proper Law of an Arbitration Agreement” (2020) 136 LQR 534.

It is also worth noting that the opinions expressed by the Minority related only to arbitration agreements contained in the main contract itself, and therefore should not be taken as applying to arbitration agreements wholly separate from the main contract.